Biotech Mania: Another Deal, Another Rally To New Highs…Update-1

Biotech Stocks More Subdued– as of Mid-Day 7/20 Trading

Biotechnology stocks are taking a rest today after a torrid five days that saw the XBI up 7.31%, FBT up 6.19% and the IBB up 6.65%. Moreover on Friday 7/17 the trading in six or more biotech small caps made the “Percentage gainer” tally in the Wall Street Journal: CALA, AXON, GENE, OPHT, XBIT,GKOS and CPHR. Last week was one of the frothiest weeks ever.

A July 18 Barron’s article, “Biotech:The Forgotten Bubble” tried to revive bubble talk mentioning 109 IPOs of which 30% were biotechs. The cautionary note was that momentum rules until it doesn’t.

MACRO Concerns Aside, Biotech Mania Led By M&A

None of the problems with China and Greece have been solved but the market swoon from last week has been moved aside. The NASDAQ composite is at highs hit in June 2015 and biotech indices hit new highs as tracked by the IBB and XBI ETFs. The biotech mania shows up in the small cap speculative XBI up 9% over five days! As has been the pattern in the past a big M&A deal reinforces one of the underlying drivers of the market. Celgene (CELG) announced a $$7.3B Celgene deal to buy Receptos (RCPT) at $232 a share. This acquisition beefs up the Celgene pipeline in inflammation and immunology including a Phase III drug Ozanimod, an S1P receptor modulator, for ulcerative colitis and relapsing multiple sclerosis with potential for IBD. The Receptos pipeline positions Celgene for growth in 2019 with 2015 guidance for Celgene reaffirming 2020 net product sales at $9-9.5B and EPS of $4.75-4.85 an increase of 29% over 2014. The guidance now balances out the Celgene pipeline with 2020 guidance from immunology and inflammation at $4B up from $3B. Hematology revenues for 2020 are expected at $14.8B and Oncology at $2.2B. CELG stock at $134.71 is up 20.4% YTD trailing the IBB up 30% YTD.

We missed Receptos, Inc. (RCPT) despite it being in the sweet spot of the market, a mid-cap with a strong product pipeline. Six of our portfolio picks have been acquired over the past two years including Pharmacyclics (PCYC) purchased by Abbvie (ABBV) in Q2 for over $21B. There are so many hot small and mid cap biotech stocks we admit to being challenged in trades and new picks.

We reiterate the key biotech trends of 2015:

  • Many biotech stocks are at new highs and momentum is furious.
  • If you are overwhelmed by all the potential stock trades an ETF trade such as IBB or XBI will keep you ahead in the game.
  • Healthcare stocks remain an important defensive holding with the XLV is up 12.8% YTD.
  • Large cap biotechs slightly lag the market up about 12% due to dependency on earnings. However Gilead (GILD) is up 26% and Regeneron (REGN) up 34%. Earnings coming soon.
  • Valuations do not matter because of M&A and pipeline potential for growth.

The market mentality now is that by the end of the year more multi-$B deals will be struck so companies with later stage biotech pipelines will outperform the market. For now don’t fight momentum don’t fight the FED.

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